What are Tick Charts in Trading?

The tick chart is a kind of technical analysis in the trading spectrum that plots the movement of asset prices depending on a certain number of executed trades.

These trades are also known as ‘ticks’, and instead of fixed time intervals like those in 1-minute, 5-minute, and hourly charts, a bar forms in this chart after a specified number of trades. Thus, by not focusing on time intervals and emphasising trades, this chart typically becomes effective, especially for short-term traders.

As a trader, if you are seeking ways to capitalise on potential from quick price movements, read about this chart in this blog.

Understanding Tick Charts in Stock Market Trading

As a trader, if you want to trade using a tick chart, you must know that a tick here represents a single trade. Thus, multiple trades or ticks form a ‘tick-by-tick’ chart that measures price movement of assets based on the market pulse rather than focusing on time intervals.

On a ‘tick by tick’ chart, a bar forms when a specified number of trades have been executed. For example, on a trading platform, you spot a 133 tick chart. Here, you will see a new bar being formed once traders execute 133 trades on its respective security.

After the formation of this bar, it is plotted on the tick chart. During formation and plotting, this chart ignores the time it took for trades to complete and for a bar to form. Thus, it becomes helpful for traders who are also participating in a fast-moving market where quick shifts are more important than considering time intervals.

Role of Tick Charts in the Stock Market

Now that you know what is tick chart, you must have a look specifically at its role in the stock market. It might help gain a broader understanding of this chart:

1. Liquidity Assessment

   One of the key roles of this chart is to indicate the liquidity of assets so that you, as a trader, can choose the right asset to trade. For example, you can spot heavily traded stocks with higher liquidity where they need ticks of around 500 to 1000 for each bar. For less active trades, you might want to go with a smaller tick range.

2. Identifies Market Volatility

   Aside from showing price movements, this chart has its role to portray market volatility. Thus, when the market is active, it typically plots more bars on the chart. Conversely, when the market is quiet, it plots fewer bars.

   Suppose you are using a 233-tick chart. During high volatility, you might see bars forming faster. When volatility is low, the same bar might take much longer to appear with fewer bars.

3. Pattern Identification

   This chart also has its role in helping to identify short-term trade patterns for you. As a trader, you can understand the momentum and speed of price changes. Depending on these and other factors, you can locate a short-term trading pattern, which might remain hidden on time-based traditional charts.

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When to use Tick Charts in trading?

Aside from understanding what is a tick chart in trading, you must also make a note of when to use it. It will help modify your trading strategy, especially if you are a short-term trader:

1. During Intraday Trades

   Booking a profit from intraday might seem complex, but it helps locate trade opportunities by analysing trade volumes. Suppose you are observing a 50-tick chart where trading activity is low, but trading volume suddenly increases. It prints each bar more frequently. This rapid formation typically indicates that an increasing volume allows you to enter the market.

2. While Scalping

   If you are into scalping, this chart might be helpful as it usually offers real-time data that helps you time trades down to seconds. It is especially effective in a highly volatile market. Suppose due to news, a 133 tick-based chart spikes in volume and prints bars every 1 to 2 seconds. Scalpers might see this as a bullish trend forming and enter a long position.

3. Use While Trend Trading

   As tick charts produce price trends based on trade execution and their volume, they play a crucial role in aiding trend traders. Suppose on a 233-tick-based chart, you see bars start forming faster. Here, each bar shows higher highs and signals an increasing trade volume, indicating a possible uptrend. With this increasing bar formation with a rising bar structure, traders estimate that a bullish reversal might be near.

A Detailed Process to Read Tick Charts

As you have understood when to use tick charts as per trading patterns, you must also learn their detailed process to read them. It might help in making optimised trading decisions and enhance your chances of booking profits:

1. Meaning of Each Tick

   Each tick represents a trade on a given security, regardless of how many shares or contracts have been involved. For example, a trade might happen for 10 shares of a company, or 10,000 shares might have been traded for the same; it counts for one tick. As a result, traders get a clearer view of momentum shifts based purely on how frequently trades occur.

2. Comprehend a Bar Formation

   You have seen that a 233 or 133 or any other number of tick-based chart pilots a bar once those said numbers complete trading. However, you must note that the time it takes to complete these trades might vary as they rely on market activities.

3. Identify Pattern Formation

   While learning what is a tick chart in trading, you must also look out for patterns appearing to make decisions. You must keep an eye on patterns such as breakouts, reversals, consolidations, etc. For example, a breakout beyond a resistance level of the price reveals a possible market entry. Breakouts below the support line suggest entering a short position.

4. Observe the Asset Price Range

   On a tick chart, the height of a bar indicates the price range of trades. Thus, it helps traders spot market volatility. Suppose one candle ranges from INR 250 to INR 252, while another bar from the next session ranges from INR 252 to INR 260. The second and taller bar signals stronger price movement due to more underlying trades for that session.

Advantages of Using Tick Charts

After gaining an understanding of the tick chart meaning, you must also look at a few of its prevailing advantages. By noting them, you might be able to reap their advantages while trading with this chart:

1. Noise Reduction and Volatility Indication

   Unlike most traditional time-based charts that might have unnecessary market noise, confusing traders, tick charts eliminate market noise by filtering out periods of low activity. It conveys a more volatile market by plotting more bars and fewer when the market is slow.

2. Helps Locate Price Swings

   With this chart, locating price swings becomes clearer and easier. As a result, it helps with identifying resistance, support and trends better. Thus, spotting breakouts also becomes easier, and as a trader, you can choose whether to open a long or short position accordingly.

Disadvantages of using Tick Charts

While having an idea about its benefits helps while trading, you must also note a few of its disadvantages. Thus, while trading, you can steer clear of investment choices that might lead to losses:

1. Varies with Platform

   Not all brokers provide reliable tick data on their platforms, and you might have to pay charges for it. Also, data from tick-by-tick charts might vary between trading platforms, which might lead to inconsistencies in trade setups and decisions.

2. Might be Complex for New Traders

   Seasoned traders might keep up with tick charts, even during a fast-moving market. However, novice traders might struggle as there might be rapid printing of bars due to higher trades and figuring out market insights, which can be complex for them.

What are the strategies for Tick Trading?

If you are looking forward to using a tick chart for trading, you must also know a few trading strategies that it might work well for. Here is a detailed view:

1. Scalping

   This type of chart helps scalpers by spotting micro trends, momentum bursts, etc, for them. It helps them to take advantage of quick price movements, and settings like 100-tick and 233-tick charts are typically common.

2. Breakout Trades

   With the help of this chart, traders take advantage of slow bar formation, indicating consolidation. They wait for a sudden spike in the speed of bar formation with price breaking out from the consolidation phase. It signals a high volume and conviction.

3. Other Strategies

   With this chart, traders also employ other strategies, such as momentum trading, making entries at support or resistance, and trading when market activity is higher.

Conclusion

A tick chart, by focusing on trading and market activities, tracks trades and creates bars on the chart indicating the price moves. During a high-paced market, it prints bars faster, and bars appear slow during a low-paced market, and traders can make decisions accordingly.

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FAQ’s on Tick Charts

1. Are tick charts efficient for intraday trading?

Yes, because, during day trades, you must make decisions more quickly, and this chart shows price movement purely based on the underlying trades, removing market noise.

2. How do traders use tick charts to identify market volatility?

During high market volatility or when the market is active, this chart prints more bars more frequently. Conversely, with low volatility, it prints fewer bars. Thus, traders can identify the underlying volatility of asset prices.

3. How do tick charts help in spotting price trends?

This chart helps you, as a trader, locate support and resistance levels better. Thus, with this, you can also spot breakouts in real time and decide on opening positions accordingly.

4. Are tick charts reliable in volatile markets?

Yes, this is because smaller tick values are typically effective for a volatile market and with quick price changes, traders can decide on trading actions effectively.